Office of Natural Resources Revenue
Federal Oil and Gas Valuation
U.S.DepartmentoftheInterior
RoyaltyValuation|Consistentanswerstocomplexquestions
Disclaimer
Thispresentationdoesnotconstituteformalvaluationguidanceanddoesnotapplytoanyspecificproperty,lease,orcase.Thispresentationdoesnotrequirethatyouperformanytypeofrestructuredaccounting,anyreporting,orrecalculateandpayroyalties.Theguidanceprovidedinthispresentationisnotanappealabledecision,order,NoticeofNoncompliance,orCivilPenaltyNoticeunder30C.F.R.Part1290SubpartB(2014)or30C.F.R.Part1241(2014).IfONRRissuesyouanorder,NoticeofNoncompliance,orCivilPenaltyNoticeatalaterdatebasedonvaluationguidance,yourappealrightswillbeprovidedatthattime.
RoyaltyValuation|Consistentanswerstocomplexquestions
Centralization of the Valuation Function
3
Royalty ValuationDivision
SME
SME
CAMS
SME
SME
SME
AssetValuation
Who is Royalty Valuation?
4
Royalty Valuation
Subject Matter Experts
Engineers GeologistsMinerals Revenue
SpecialistsEconomists
Royalty Valuation | Consistent answers to complex questions
What We Do
5
RVRV
GuidanceGuidance
DeterminationsDeterminations
Requests to Exceed
Requests to Exceed
RegulationsRegulations
Reporter Letters
Reporter Letters
Other ProjectsOther Projects
Royalty Valuation | Consistent answers to complex questions
• Supported by Regulations and Case Law• Cites Lease terms, Regulations, Appeals,
Court cases, IBLA decisions and Policy Documents
• All written guidance is reviewed by peer groups and supervisors
• Consistent• May fix issues before an audit
Benefits of Guidance
6
Valuation Regulations
30 CFR Part 1206
◆Federal Oil: § 1206.100 ‐ § 1206.120
◆Federal Gas: § 1206.150 ‐ § 1206.160
Electronic Code of Federal Regulations: http://www.ecfr.gov/
RoyaltyValuation|Consistentanswerstocomplexquestions
Outline
▪ ONRR Royalty Equation▪ General Valuation Principles▪ Sales Type Codes▪ Oil Valuation▪ Gas Valuation▪ Allowances▪ Contracts▪ Bundled Costs▪ Fuel
RoyaltyValuation|Consistentanswerstocomplexquestions
ONRR Royalty Equation
RoyaltyDue=[Volume x UnitValuex RoyaltyRate]‐ Allowances
OilExample:VolumeSold=100bblUnitValue=$90/bblRoyaltyRate=12.5%AllowableTransportationCost=$1.00/bbl
[100bbl*$90/bbl *0.125] – [$1.00/bbl*100bbl*0.125] =$1,112.50
RoyaltyValuation|Consistentanswerstocomplexquestions
General Valuation Principles
▪ Royalty is due on the quantity & quality of production as measured at the approved Royalty Settlement Point when it is severed from the lease
▪ Arm’s‐Length (ARMS) or Non‐Arm’s‐Length (NARM)
▪ Gross proceeds
▪ Marketable conditionRoyaltyValuation|Consistentanswerstocomplexquestions
Royalty Measurement Point
BLM or BSEE-Approved Measurement Point
Federal LeaseWell
Well
▪ To market via pipeline, rail, or truck
▪ Downstream metering can include:
▪ LACT meter
▪ API skid
▪ Tank measurements
▪ Custody transfer point
▪ Plant inlet
▪ Refinery inlet
▪ Storage inlet
Royaltyisdueonthequantity&qualityof
productionseveredfromtheleaseasmeasuredattheBLM
orBSEEapprovedRoyaltySettlementPoint
GasQualityInformation▪ The“dry”heatingvalue
mustbeusedunlesswatervaporcontenthasbeendetermined
▪ Iftheactualwatervaporwasdetermined,the“real”or“actual”heatingvalueofthegasstreammustbeused
RoyaltyValuation|Consistentanswerstocomplexquestions
Arm’s‐Length or Non‐Arm’s‐Length?
Are the parties…– Independent?– Unaffiliated?
• Determinedbydegreeofcontrol– Actingwithopposingeconomicinterests?
Relation by blood or marriage is automatically a non-arm’s length relationship
RoyaltyValuation|Consistentanswerstocomplexquestions
Affiliation
• Affiliation– Entitycontrols,iscontrolledby,orisundercommoncontrolwithanotherentity
• Control
• Opposing Economic Interests – FactorsoutlinedinVastarResources,Inc. 167I.B.L.A17(2005)• Seeparagraph2onpage497
0%
10%
50%
100%
Degree of Control
NARM
Consider additional
factors
ARMS
RoyaltyValuation|Consistentanswerstocomplexquestions
Gross Proceeds
Gross Proceeds – “the total monies and other consideration” the lessee receives for disposition of production.
• Value can never be less than gross proceeds accruing to lessee
• Gross proceeds includes:– Reimbursements
• taxes• Production‐relatedcosts
– Valueofcertainservices
• Let’s look at an example…
RoyaltyValuation|Consistentanswerstocomplexquestions
Gross Proceeds ExampleYou produce 1 barrel of oil from federal land that is adjacent to your backyard and sell
it to your neighbor for:▪ $20▪ 5chickens▪ 1goat
RoyaltyValuation|Consistentanswerstocomplexquestions
Gross Proceeds Example
What are your “total monies and other consideration”?
A. $20
B. The chickens and the goat
C. $20 and the market value of the 5 chickens and 1 goat
RoyaltyValuation|Consistentanswerstocomplexquestions
Marketable Condition
▪ Lessee is responsible for placing production in marketable condition at no cost to the lessor
▪ Common costs include:• Oil:separation;freeofimpurities• Gas:gathering;compressing;sweetening;anddehydrating
▪ Cannot reduce royalties by transferring the costs on to the purchaser for a lesser sales value
▪ Add to proceeds if sold in less than marketable condition
ONRR defines “gathering” more specifically than industry. For ONRR, gathering means moving production to a central accumulation point. Industry, however, uses the term
gathering when referring to any movement up to the main transmission pipeline.
RoyaltyValuation|Consistentanswerstocomplexquestions
Outline
▪ ONRR Royalty Equation▪ General Valuation Principles▪ Sales Type Codes▪ Oil Valuation▪ Gas Valuation▪ Allowances▪ Contracts▪ Bundled Costs▪ Fuel
RoyaltyValuation|Consistentanswerstocomplexquestions
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Sales Type Codes
Value is established at the time production is sold or removed from lease
How product is sold or removed dictates the sales type code (STC)
Multiple sales methods – multiple lines
Relates to sales contract, NOT transportation or processing contract
RoyaltyValuation|Consistentanswerstocomplexquestions
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Sales Type Codes
4‐digitalpha‐numericcode
Required for the following transaction codes:• TC01,11,12,14,15,41,53,54
Optional for the following transaction codes:• TC06,10,13,31,37,38,39,40,42
Not required for rent, minimum royalty, other annual obligations, or any other transaction codes
RoyaltyValuation|Consistentanswerstocomplexquestions
21
Sales Type Codes
• Arm’s‐lengthtransactionsARMSARMS
• Non‐arm’s‐lengthtransactionsNARMNARM
• Pooledsales,bothARMSandNARM.IncludesNGLsderivedfrompooledgasPOOLPOOL
• Royalty‐in‐kinddeliveriesRIKDRIKD
• ForFederaloilvaluedbasedonindexpriceOINXOINX
• ARMSpercentage‐of‐proceedscontractAPOPAPOP
• NARMpercentage‐of‐proceedscontractNPOPNPOP
• OthercodeswillbeaddedasfuturevaluationagreementsarenegotiatedwithindividualcompaniesCodes assigned as neededCodes assigned as needed
RoyaltyValuation|Consistentanswerstocomplexquestions
22
FederalOil Valuation
30 CFR § 1206.100 - § 1206.120
RoyaltyValuation|Consistentanswerstocomplexquestions
23
Oil Valuation
Oil Valuation Decision Tree
Oil
Arm’s‐Length
GrossProceeds
Adjustments
ARMSExchange
NARMSaleorTransfer,thenARMSsale
ORChoose
Minimum2‐yearselection
Choose
Minimum2‐yearselection
Non‐Arm’s‐Length
RockyMountains
California,Alaska
EverywhereElse
ANS
Adjustments
Benchmarks
Adjustments
NYMEX
Adjustments
RoyaltyValuation|Consistentanswerstocomplexquestions
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Oil Valuation | Arm’s‐Length
• Generally accept gross proceeds under ARMS sales contracts
• If you sell or transfer oil to affiliate and affiliate sells ARMS, may use either ARMS or NARM rules‐‐must use election for 2 years
• If you sell under ARMS exchange agreement(s), may use either ARMS or NARM rules‐‐must use election for 2 years
RoyaltyValuation|Consistentanswerstocomplexquestions
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Oil Valuation | Non‐Arm’s‐Length
ThreeRegions ValuationMethodologyCaliforniaorAlaska ANSaveragespotprice
RockyMountainRegion• MT,ND,SD,WY,CO*, &UT*
Valuationbenchmarks
RestoftheCountry• Otherstates• Outer ContinentalShelf(OCS)• *FourCornersregionofCO&UT
NYMEX withtheroll
RoyaltyValuation|Consistentanswerstocomplexquestions
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Oil Valuation | Non‐Arm’s‐Length
Rocky Mountain Region Benchmarks ONRR‐approvedtenderingprogram AverageofARMSsales/purchasesinfieldorarea 2years
CushingWTINYMEXpricewithouttherolladjustedforlocationandquality 2years
ONRR‐approvedalternative
RoyaltyValuation|Consistentanswerstocomplexquestions
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Oil Valuation ‐ Adjustments
When value is determined using NYMEX or ANS Spot Prices, you may adjust for:
Valuebetweenleaseandmarketcenter• Transportcostsorexchangedifferential(cannottakeboth)
ValuebetweenmarketcenterandCushing(forNYMEX)• Exchangedifferentialorpublisheddifferentials
Quality‐ useexchangeagreementsorqualitybanksatthemarketcenter.Iftherearenone,use:• Gravitytablesinpricingbulletins• Sulfurdifferentialof5¢ per0.1percent
RoyaltyValuation|Consistentanswerstocomplexquestions
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Oil Valuation Example
Artesia, NM
Roswell, NM
Midland, TX
Cushing, OK
Transport Exchange
ValueAdjustment
2 NoactualexchangetoCushing,sousetheONRR‐ApprovedpublishedWTIDifferential ‐$3.50/bbl
3 Useactualexchangeagreementforadjustment ‐$2.75/bbl
4 Useactualcostsoftransportation $1.25/bbl
1 UseNYMEXwiththeroll $95/bbl
ValueforRoyaltyPurposes:
AdjustedPriceforSalesValue TransportationAllowance
29
Oil Valuation | Publications
Publications must be approved by ONRR Criteria for selection in 30 CFR § 1206.104 Announced in the Federal Register, June 13, 2000, page 37043
o Platt’sOilgram PriceReporto PetroleumArgusAmericasCrudeo BloombergOilBuyersGuidePetroleumPriceSupplement
RoyaltyValuation|Consistentanswerstocomplexquestions
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FederalGas Valuation
30 CFR § 1206.150 - § 1206.160
RoyaltyValuation|Consistentanswerstocomplexquestions
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Gas Valuation
Gas Valuation Decision Tree
Gas
Processed Unprocessed
Arm’sLength
Non‐Arm’sLength
Arm’sLength
Non‐Arm’sLength
GrossProceeds
Deductions
Benchmarks
Deductions
GrossProceeds
Deductions
Benchmarks
Deductions
RoyaltyValuation|Consistentanswerstocomplexquestions
Definition of Processing
30CFR§ 1206.151(Definitions)
Processing means any process designed to remove elementsor compounds (hydrocarbon and nonhydrocarbon) from gas,including absorption, adsorption, or refrigeration. Fieldprocesses which normally take place on or near the lease,such as natural pressure reduction, mechanical separation,heating, cooling, dehydration, and compression are notconsidered processing. The changing of pressures and/ortemperatures in a reservoir is not considered processing.
32RoyaltyValuation|Consistentanswerstocomplexquestions
• Gasthatisprocessed• GasthatissoldARMSpriortoprocessing,butrightstoprocessedgasarereservedorexercised
• Anygasnotcoveredundertheunprocessedrules
• Gasthatisnotprocessed
• Gasthatisprocessed,butsoldARMSpriortoprocessingandnorightstoprocessedgasarereservedorexercised
• Gasthatisnotprocessed
• Gasthatisprocessed,butsoldARMSpriortoprocessingandnorightstoprocessedgasarereservedorexercised
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Gas Valuation | Processed vs. Unprocessed
RoyaltyValuation|Consistentanswerstocomplexquestions
• Royaltyispaidon:• Residuegasvalue• Gasplantproductsvalue• Condensatevaluerecovereddownstreamoftheroyaltysettlementpointandpriortoprocessing
• Lessallowabledeductions:• Transportation• Processing
• Royaltyispaidon:• Unprocessedgasvolumeattheapprovedroyaltymeasurementpoint(x)unitprice
• Lessallowabledeductions:• Transportation
• Royaltyispaidon:• Unprocessedgasvolumeattheapprovedroyaltymeasurementpoint(x)unitprice
• Lessallowabledeductions:• Transportation
34
Gas Valuation | Royalty
RoyaltyValuation|Consistentanswerstocomplexquestions
35
Gas Valuation | ARM vs. NARM
ValueforArm’s‐LengthContracts
• Generallyacceptgrossproceeds
ValueforNon‐Arm’s‐LengthContracts
• FirstApplicableof3orderedbenchmarks
• DualAccounting:Ifyouoryouraffiliateprocessyourgasandthenselltheresiduegasunderanon‐arm’s‐lengthcontract,youmustperformdualaccountingunder30CFR§ 1206.155.
RoyaltyValuation|Consistentanswerstocomplexquestions
Gas Valuation | NARM | 3 Benchmarks
36
Ifyournon‐arm’s‐lengthgrossproceedsareequivalenttogrossproceedsfromyourarm’s‐lengthsalesorpurchasesoflike‐qualitygasfromthesamefieldorarea,youcouldusethearm’s‐lengthpricefornon‐arm’s‐lengthgas.
Ifyournon‐arm’s‐lengthgrossproceedsareequivalenttogrossproceedsfromyourarm’s‐lengthsalesorpurchasesoflike‐qualitygasfromthesamefieldorarea,youcouldusethearm’s‐lengthpricefornon‐arm’s‐lengthgas.
Avaluedeterminedbyconsideringinformationrelevantinvaluinglike‐qualitygas(unprocessedorresidueandplantproducts),includinggrossproceedsfromarm’s‐lengthsales,postedprices,spotmarketprices,andthelike.
Avaluedeterminedbyconsideringinformationrelevantinvaluinglike‐qualitygas(unprocessedorresidueandplantproducts),includinggrossproceedsfromarm’s‐lengthsales,postedprices,spotmarketprices,andthelike.
Anet‐backmethodorotherreasonablemethodtodeterminevalue.Anet‐backmethodorotherreasonablemethodtodeterminevalue.
RoyaltyValuation|Consistentanswerstocomplexquestions
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Netting
Nettingmeansthedeductionofanallowancefromthesalesvaluebyreportinganetsalesvalue,insteadofcorrectlyreportingthedeductionasaseparateentryonFormMMS–2014.
Whenisitoktonet? A.Never. B.Whenyouhaveanarm’s‐lengthPOPContract C.Whenyouhaveatransportationfactor. D.Periodicallywhentheurgestrikes.
RoyaltyValuation|Consistentanswerstocomplexquestions
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Transportation & Processing Allowances
Arm’s‐LengthContracts
• Basedonactualcosts(contractcharges)
Non‐Arm’s‐LengthContracts
• Based on lessee’s actual operating and capital costs for the pipeline or plant• Rate of return for O&G Transportation allowances = 1.3 * Standard & Poor’s BBB Bond Rate
• For Gas Processing, = 1 * BBB Bond Rate
RoyaltyValuation|Consistentanswerstocomplexquestions
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Transportation & Processing Allowances
AllowanceLimits 50% transportation 662/3% processing MayrequestexceptionfromONRR
Combinationoftransportationandprocessingallowancecannotexceed99% ofthevalueoftheproduct
ONRR defines “gathering” more specifically than industry. For ONRR, gathering means moving production to a central accumulation point. Industry,
however, uses the term gathering when referring to any movement up to the main transmission pipeline.
0%
25%
50%
75%
100%
TransportationAllowance
ProcessingAllowance
RemainingRevenuePercentageAllowance
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Oil Transportation | Allowable Charges
ARMSLineLoss:actualortheoreticalARMSLineLoss:
actualortheoreticalNARMSLineLoss:
actualonlyNARMSLineLoss:
actualonlyLineFillLineFill Qualitybankadministrationfees
Qualitybankadministrationfees
ARMSonly:Costofaletterof
credit
ARMSonly:Costofaletterof
credit
Feespaidforloadingorunloading
Feespaidforloadingorunloading
Transferfeespaidtoahuboperator
Transferfeespaidtoahuboperator
Paymentforvolumetricdeductiontocovershrinkage
Paymentforvolumetricdeductiontocovershrinkage
ARMSonly:Feespaidforrequiredshort‐termstorage(lessthan30days)
ARMSonly:Feespaidforrequiredshort‐termstorage(lessthan30days)
ARMSonly:Feespaidtopumpoiltoanothercarrier’s
systemorvehicleasrequiredbyatariff
ARMSonly:Feespaidtopumpoiltoanothercarrier’s
systemorvehicleasrequiredbyatariff
RoyaltyValuation|Consistentanswerstocomplexquestions
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Gas Transportation |Examples of Specific Charges
UnusedfirmdemandcostsUnusedfirmdemandcosts
ARMSonly:Costsofsecuringaletterof
credit
ARMSonly:Costsofsecuringaletterof
credit
ARMSLinelossfees(involumeorvalue):actualortheoreticalloss
ARMSLinelossfees(involumeorvalue):actualortheoreticalloss
NARMLinelossfees(involumeorvalue):actualloss
only
NARMLinelossfees(involumeorvalue):actualloss
only
Feespaidtobrokers
Feespaidtobrokers
Feespaidtoschedulingservice
providers
Feespaidtoschedulingservice
providers
InternalCostsInternalCosts
RoyaltyValuation|Consistentanswerstocomplexquestions
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Gas Transportation | Non‐Arm’s‐Length Exception
Non‐Arm’s‐Length exception to calculating actual costs.
You may request an exception if: Youmeettwocriteria:
1. TransportationsystemmusthaveatarifffiledwithFERC
2. Thirdpartiesarepayingpricestoshiptheirgas WithONRRapproval,youmaydeductthelesserof:
• Thetariffamount,OR• Thevolume‐weighted‐averageofthirdpartyprices
RoyaltyValuation|Consistentanswerstocomplexquestions
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OCSLA Section 6 Leases
The State of Louisiana and Texas issued oil and gas leases for submerged offshore lands prior to the enactment of the Outer Continental Shelf Lands Act (OCSLA) (43 U.S.C. §§1331 et seq) (Aug. 7, 1953).
The OCSLA provides that the outer continental shelf lands are in the Federal domain and thus subject to Federal oil and gas leasing.
However, Section 6 of the OCSLA (43 U.S.C. § 1335), essentially provides that existing leases issued by Louisiana and Texas would be maintained as Federal leases and are subject to the original provisions as provided on the state lease forms. We now generally refer to these as “Section 6 leases.”
Because of the unique nature of these lease forms and their interpretation, please contact our office for guidance.
RoyaltyValuation|Consistentanswerstocomplexquestions
Coalbed Methane
Unique reporting requirements on the OGOR & 2014 reports Key Resources
– AmocoProductionCo.v.Watson (D.CCir.2005)(Seepgs 12‐19foragooddiscussiononCBMmarketablecondition)
– DevonEnergyCorp‐ October9,2003ValuationDetermination(upheldinDevonEnergyCorp.v.Kempthorne,551F.3d1030(D.C.Cir.2008))
– 30CFR§§ 1206.152(i)and1206.153(i)– CurrentDearReporterLetterdatedOct4,2005
• http://www.onrr.gov/FM/PDFDocs/20051004.pdf– ONRRMineralsRevenueReporterHandbook
• http://www.onrr.gov/FM/PDFDocs/RevenueHandbook.pdf45
RoyaltyValuation|Consistentanswerstocomplexquestions
Coalbed Methane Random Quiz
Is Coalbed Methane Ever Processed? A. Yes B. No C. This is a trick question! D. What about the Fruitland Coal Fm.?
46RoyaltyValuation|Consistentanswerstocomplexquestions
47
Percentage‐of‐Proceeds (POP) Contracts
For ONRR, a POP contract is a contract:1. Forthesaleofgas,2. Priortoprocessing,3. Valueisbasedonapercentageofthepurchaser’s
proceedsresultingfromprocessing
Value is determined
Gas producing lease
NGLs to Sale
Residue Gas to Sale
Condensate to Sale
HereGas sold – title transferred here
RoyaltyValuation|Consistentanswerstocomplexquestions
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POP Contracts | Arm’s‐Length
Federal Arm’s‐Length (APOP) royalties are based on the greater of:• Gross Proceeds under the POP contract, or• Value of 100 % of the residue gas attributable to the property
APOP Contract Transportation Costs• If there are charges in your APOP sales contract related to transportation, they may be deducted from your gross proceeds, and should not be claimed as allowances.
• However, the royalties paid may not be less than 100% of the value of the residue gas
RoyaltyValuation|Consistentanswerstocomplexquestions
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POP Contracts | Non‐Arm’s‐Length
Federal Non‐Arm’s‐Length (NPOP) royalties are based on processed gas proceeds, sum of:• Residuegasvalue• Gasplantproductsvalue• Condensatevaluerecovereddownstreamofroyaltysettlementpointandpriortoprocessing
• Lessapplicableallowances**Youmustreportyouraffiliate’sreasonable,actualcostsoftransportationandprocessingseparately.
RoyaltyValuation|Consistentanswerstocomplexquestions
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Keep Whole Contracts
Valued and reported as Processed Gas Royalty also due on condensate recovered by service provider prior to processing
Processing costs are: Value of any NGL’s kept by the processor, less Value of make‐up residue gas provided by processor• Processing may include the cost of make‐up gas paid for
by the producerPlantInlet PlantOutlet
RoyaltyValuation|Consistentanswerstocomplexquestions
• Unbundling=theprocessoftakingagastransportationand/orprocessingfeeanddeterminingtheallowed anddisallowed costsforRoyaltyReportingandPayment.Includes:
Determiningmarketablecondition
SeparatingtheGathering/TransportationFeesfromProcessingFees
ApplyingtheappropriateUnbundlingCostAllocations(UCAs)*tothefeesyouarechargedfortransportation,gathering,compression,dehydration,treatment,andprocessing
*Note:AUCAisthepercentofafeethatisallowable(therewilllikelybeadifferentpercentageforTransportationandProcessing)
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What is Unbundling?
RoyaltyValuation|Consistentanswerstocomplexquestions
What is Expected of Industry
Properly Report and Pay Royalties Correctly calculate transportation and processing allowances
• Option1– Takenoallowance• Option2‐ Unbundle–CalculateyourownUCAs–UseONRRUCAsifavailable
53RoyaltyValuation|Consistentanswerstocomplexquestions
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TheONRRUnbundlingwebsitecanbefoundat:http://www.onrr.gov/unbundling/default.htm
Toenterthewebsite,youmustreadtheDisclaimerandthenselect the“IUnderstand” box
Applying the Unbundling Cost Allocations (UCAs)(“Understanding” the Disclaimer)
TheONRRUnbundlingwebsitecanbefoundat:http://www.onrr.gov/unbundling/default.htm
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Applying the Unbundling Cost Allocations (UCAs)(ONRR Unbundling website)
RoyaltyValuation|Consistentanswerstocomplexquestions
More detailed information is available on the ONRR Unbundling website
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An Example of the Unbundling Process(Identify Data Needs)
RoyaltyValuation|Consistentanswerstocomplexquestions
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The Unbundling Process
STARTIdentify Gas Plant and
Transportation Systems
Determine Marketable Condition
Identify Data NeedsCollect the Data
Calculate the Unbundling Cost
Allocations (UCAs)
Apply the Unbundling Cost Allocations
(UCAs)
Report and Pay Royalties CorrectlyEND
RoyaltyValuation|Consistentanswerstocomplexquestions
Communications | ONRR Mailbox
Mailbox Exclusively for Questions and Requests Regarding Unbundling
RoyaltyValuation|Consistentanswerstocomplexquestions
BLM or BSEE-Approved Measurement Point
Federal LeaseGas Well
Gas Well
Compressor Station
Gas Processing Plant
Royalty is due on all gas produced from a Federal lease, except:
• Beneficial use (gas used on lease)
• A reasonable amount of residue gas used to operate a gas plant
Federal Gas30 CFR 1202.150(a) and (b)(1), 30 CFR 1202.151(b)Indian Gas30 CFR 1202.555
59
Gas Used or Lost Along a Pipeline: Understanding the Issue
60
Gas Used or Lost Along a Pipeline: An Example
Federal LeaseRoyalty-bearing Volume
1,000 MMBtuGas used or lost along the pipeline
100 MMBtu
Plant Inlet
900 MMBtu
NGL Sales
2,000 gal
Residue Sales
800 MMBtuRoyalty Reporting
Product Code SalesVolume03 800MMBtu07 2,000gal15 100MMBtu
The allowable portion of gas used or lost may be included in the transportation allowance.
BLM or BSEE-Approved Royalty Measurement Point
• Royalty has always been due on 100 percent of the volume measured at the approved royalty measurement point
• The cost of allowable fuel may be included in the transportation allowance
• Using PC 15 is the only new requirement • Resources:
– http://onrr.gov/DearRep.htm• http://onrr.gov/PDFDocs/Field‐Fuel‐Valuation‐and‐Reporting.pdf
– http://onrr.gov/ReportPay/training/default.htm• http://onrr.gov/About/PDFDocs/ChrisCareyCOPASFieldFuelPresentationFINAL20131216.pdf
61
Gas Used or Lost Along a Pipeline: Key Points
Plant Fuel
62
Royalty ReportingProd Code SalesVolume03 1,040 MMBtu
From the reporter letter: When the plant reduces your residue allocation for gas used in the plant, you should add the disallowed portion of gas used in the plant to your residue (PC 03) volume and value when paying royalty.
Residue Sales
1,000 MMBtu
Total Fuel used = 140 MMBtu
Disallowed Fuel = 40 MMBtu
Multiple Choice Question
The residue gas sales MMBtu reported on the ONRR form 2014 should be:
A) 1,000 MMBtu
B) 1,040 MMBtu
C) 1,140 MMBtu
63
CEVA | Coordination, Enforcement, Valuation, & Appeals
CEVAProgramDirector:
CEVAProgramDirector:
State&IndianCoordinationState&IndianCoordination
Enforcement&Appeals
Enforcement&Appeals AssetValuationAssetValuation
Economic&MarketAnalysisOffice
Economic&MarketAnalysisOffice
RoyaltyValuationRoyaltyValuation
UnbundlingUnbundling
RoyaltyValuation|Consistentanswerstocomplexquestions
65
Bundled Costs
• A single rate for several services:– Gathering– Transporting– Compressing– Treating– Processing
• Deductions only allowed for:– Cost to transport royalty-bearing gas– Cost to process royalty-bearing gas
• What is not allowed? – Devon Decision– Gathering – movement from the
wellhead to the approved royalty settlement point
– Treating to reach marketable condition – Compression to reach marketable
condition – Costs to remove non-royalty-bearing
substances
66
Unbundling Costs
How do I un-bundle fees?
• Determine what costs are allowable for processing and/or transportation
• Follow the gas as it moves through the pipe– Gathering: wellhead to the approved measurement point – not
deductible– Allowable transportation costs: pipe, maintenance, operation,
and compression to maintain pressure– Allowable processing costs: extraction royalty-bearing products
- usually NGLs (CO2 only if marketed)
67
Unbundling Example
Fed 2
Fed 5Fed 4
Fed 3
Fed 1
BLM Approved Measurement Point
Compression & Dehydration
Flat, arm’s-length rate of $1.00/Mcf for:•Gathering
•Compression
•Dehydration
•Transportation
•Processing
Allowable?
•No
•Partial
•No
•Yes
•Yes
You must work with the service provider to determine what portion of the $1.00 fee is allowable.
400 psig
800 psig
1,200 psig
7 #/MMcf
Compressor Station 1
Compressor Station 2 Gas
Processing Plant
Interstate Pipeline Specs
•1,000 psig
•7 #/MMcf H2O
Boosting
68
Unbundling Costs
• ONRR is working to make unbundling information available to payors
• Oct 6, 2010 Dear Reporter Letter– Good discussion on unbundling– Outlines how we determine allowable costs
• Unbundling website– http://www.onrr.gov/Unbundling/default.htm– Allowable percentages– Example calculations
Asset Valuation Contact Information
69
Asset Valuation Program Manager: Richard Adamski
Economic & Market Analysis Office
Michael DeBerard
Royalty Valuation Amy Lunt &
Peter Christnacht
UnbundlingDoug Ginley
Royalty Valuation | Consistent answers to complex questions